Tax plan rolls back energy credits

The House of Representatives narrowly passed the One Big Beautiful Bill along party lines. The proposed bill would terminate or otherwise make significant changes to several of the energy tax credits created or expanded by the Inflation Reduction Act of 2022, generally with very short transition periods. The proposed bill would also impose significant additional barriers to qualifying for and utilizing credits with respect to projects involving certain foreign entities of concern.

The bill will now go to the Senate, where it is expected to undergo additional changes before passage in the Senate. Some moderate Senate Republicans have indicated a desire to soften some of the House changes to the energy credits. The stated goal of the Republicans is to pass the bill and have it on President Trump’s desk for signature by July 4.

Table Summary of Changes to Certain Energy Tax Credits

Credit	Termination	Transferability	Foreign Entities
45Y – Clean Electricity Production Credit	Credit is available only for a qualified facility (other than advanced nuclear facilities or any nuclear facility the reactor design for which is approved by the Nuclear Regulatory Commission) (i) as to which construction begins within 60 days after enactment and (ii) that is placed in service by 12/31/2028. Credit is available for qualified facilities that are advanced nuclear facilities or any nuclear facility the reactor design for which is approved by the Nuclear Regulatory Commission as to which construction begins by 12/31/2028.	Credits remain transferable.	“Prohibited Foreign Entities” are not eligible to receive a credit. A facility receiving material assistance from a prohibited foreign entity is not a qualified facility. For purposes of the bill, the term prohibited foreign entities include “specified foreign entities” and “foreign influenced entities,” which can be domestic or foreign. See below for detail.
Section 48E – Clean Electricity Investment Credit	Credit is available only for a qualified facility (other than advanced nuclear facilities) (i) as to which construction begins within 60 days after enactment and (ii) that is placed in service by 12/31/2028. Credit is available for qualified facilities that are advanced nuclear facilities as to which construction begins by 12/31/2028.	Credits remain transferable.	“Prohibited Foreign Entities” are not eligible to receive a credit. A facility receiving material assistance from a prohibited foreign entity is not a qualified facility. Recapture of 100% of the credit if a taxpayer makes certain payments, generally including dividends, interest, rent, royalties, or service payments, above a certain threshold to a prohibited foreign entity before the close of the 10-year recapture period beginning on the date the property is placed in service.
Section 45Q - Carbon Oxide Sequestration	No changes	Repeals transferability of the credit for carbon capture equipment the construction of which begins after the date which is two years after the date of enactment.	“Prohibited Foreign Entities” are not eligible to receive a credit.
Section 45U – Zero-Emission Nuclear Power Production Credit	Credit is available only for tax years beginning by 12/31/2031.	Credits remain transferable.	“Prohibited Foreign Entities” are not eligible to receive a credit.
Section 45X – Advanced Manufacturing Production Credit	Credit is available only for eligible components sold by 12/31/2031.	Repeals transferability of the credit for components sold after 12/31/2027.	“Prohibited Foreign Entities” are not eligible to receive a credit. A facility receiving material assistance from a prohibited foreign entity is not a qualified facility.
Section 48 – Energy Credit	Phase-out of the base credit for geothermal property, construction of which begins before January 1, 2032.	Repeals transferability for property construction of which begins after the date that is 2 years after the date of enactment of the act.	“Prohibited Foreign Entities” are not eligible to receive a credit.

Termination and Modification of Certain Credits

Under current law, both the section 45Y and section 48E credits (the technology-neutral clean energy credits) are expected to begin phasing out in 2032. The bill as passed in the House removes the phase-out provisions for both credits, and would terminate the credits for projects construction of which begins more than 60 days after enactment. To qualify, any project must also be placed in service by December 31, 2028.

Section 45U (nuclear) credits are also terminated for tax years beginning after December 31, 2031.

Under current section 45X, the advanced manufacturing production credit is set to be phased out beginning in 2030 and eliminated entirely for eligible components sold after December 31, 2032. Under the existing phase out, taxpayers are eligible for (i) 75% of the credit for eligible components sold during calendar year 2030, (iii) 50% of the credit for eligible components sold during calendar year 2031, and (iv) 25% of the credit for eligible components sold during calendar year 2032. However, the current bill would terminate the section 45X credit, so that eligible components sold after December 31, 2031, would not be eligible for the credit.

The draft bill also terminates several credits for property acquired or placed in service after December 31, 2025. The bill terminates the following credits:

Previously-Owned Clean Vehicle Credit under section 25E;
Clean Vehicle Credit under section 30D;
Qualified Commercial Clean Vehicles Credit under section 45W;
Alternative Fuel Vehicle Refueling Property Credit under section 30C;
Energy Efficient Home Improvement Credit under section 25C;
Residential Clean Energy Credit under section 25D;
New Energy Efficient Home Credit under section 45L; and
Clean Hydrogen Production Credit under section 45V (terminated for property which begins construction after December 31, 2025).

The section 30D credit would continue to be available for eligible vehicles placed in service by December 31, 2026 if such vehicles are from manufacturers that have sold 200,000 or fewer covered vehicles for use in the US from December 31, 2009, to December 31, 2025. Homes as to which construction began before May 12, 2025, would qualify for the section 45L if acquired on or before December 31, 2026.

Transferability of Credits

The draft bill would also change the application of the transferability of certain credits (under section 6418 of the Code).

Section 45Z clean transportation fuels credits are not transferrable for fuel produced after December 31, 2027.
Section 45X credits are not transferrable for components sold after December 31, 2027.
Section 45Q credits from carbon capture equipment which begins construction after two years of enactment are not transferable.
Section 48 credits for geothermal property which begins construction after 2 years of enactment are not transferable.

We note that the current bill would not make any changes to elective pay under section 6417.

Prohibited Foreign Entities and the Credits

The bill introduces the idea of “prohibited foreign entities,” which consists of “specified foreign entities” or “foreign-influenced entities.” New section 7701(a)(51) would define these terms. A specified foreign entity is generally a foreign entity of concern that has been determined to be engaged in unauthorized conduct detrimental to the national security or foreign policy of the United States, including Chinese military companies and other entities specified under the National Defense Authorization Act for Fiscal Year 2024, as well as “foreign controlled entities” which includes governments and citizens or residents of certain countries. Foreign-influenced entities generally include domestic or foreign entities with significant ownership or financial ties to specified foreign entities.

Prohibited foreign entities would generally be ineligible for the section 45Y, 48E, 45U, 45Q, 45X, 45Z, or 48 (limited to geothermal property) credits under the current bill. Specifically, specified foreign entities would be ineligible for credits in tax years starting in the tax year after the date of enactment, while foreign influenced entities would be ineligible starting in the taxable year beginning after the date which is two years after the enactment. For purposes of section 45Y and section 48E, taxpayers making certain payments to prohibited foreign entities would also be ineligible for credits in tax years beginning two years after the date of enactment. This special payment rule also applies for section 45X credits but only for certain taxpayers.

Credits under sections 45Y, 48E, and 45X generally would not be allowed if the taxpayer receives material assistance from a prohibited foreign entity. New section 7701(a)(52) would define “material assistance from a prohibited foreign entity” as, with respect to any property, any component, subcomponent, or applicable critical mineral included in such property that is extracted, processed, recycled, manufactured or assembled by a prohibited foreign entity or any design of such property based on any copyright or patent of a prohibited foreign entity or any know-how or trade secret provided by a prohibited foreign entity. Such term would exclude certain “assembly parts” or “constituent materials,” provided that such parts or materials are not acquired directly from a prohibited foreign entity. Section 45X credits also would not be allowed with respect to any property that is produced subject to a license agreement with a prohibited foreign entity having a value in excess of $1,000,000. For purposes of 45X, these provisions would apply for taxable years beginning after two years of enactment. For purposes of Section 45Y and 48E, these provisions would apply to projects for which construction begins after December 31, 2025.

Eversheds Sutherland Observation: A taxpayer with a qualifying project for purposes of section 45Y or section 48E or producing eligible components for purposes of section 45X will want to analyze the material assistance provisions closely. Although there are exceptions for property not uniquely designed, the material assistance provision is broad and could impact many projects depending upon the timing of beginning of construction in the case of sections 45Y or 48E or production in the case of section 45X.

Finally, the bill would amend section 50(a) to include a new recapture provision for section 48E credits. If a taxpayer that claimed a section 48E credits makes certain payment in a taxable year to prohibited foreign entities, within the ten-year recapture period (measured from the date the credit property is placed into service), then the entire credit can be recaptured. The recapture provision goes into effect in the taxable year after the year in which the act is enacted.

Eversheds Sutherland Observation: The House bill relies on the rollback of energy tax credits as a revenue raiser to offset other tax cuts. What is not clear is how much revenue the rollbacks would actually raise. Although Senate Republicans have indicated an interest in softening some of these changes, it is not a certainty that they will be able to do so as any changes made by the Senate will need to be approved by the House.

During the negotiation of the House bill, there were changes in the termination and effective date provisions as reflected in the bill passed by the House. Going forward, taxpayers intending to claim tax credits will need to closely follow the legislative process, as the termination and effective date provisions may look different based on changes that may be made in the Senate. Because many of the changes to current law are based on the timing of beginning of construction taxpayers will also need to have a clear understanding of this concept and evaluating tax credit opportunities.

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